Long-term contracts:
A) are preferable to short-term contracts when there is a minimal need for cooperation.
B) are preferable to vertical integration when it is not feasible to exchange hostages.
C) generally result in lower prices than competitive bidding.
D) achieve exactly the same outcomes as vertical integration, but they incur higher bureaucratic costs.
E) are a low-cost alternative to vertical integration when it is possible to build cooperative relationships with suppliers.

Question

Quizplus · Accepted Answer

Long-term contracts are a low-cost alternative to vertical integration when it is possible to build cooperative relationships with suppliers. They provide security of supply and help to reduce transaction costs. However, when there is a minimal need for cooperation or when it is not feasible to exchange hostages, short-term contracts or vertical integration may be more preferable. Competitive bidding may result in lower prices than long-term contracts but it also involves higher transaction costs. Therefore, the best choice is E.

Long-Term Contracts